Please answer this question and briefly explain
Alles Ales (AA) and Barnicle Boats (BB) each need $5 million in funds and go to the market for quotes.
They are quoted: for AA - fixed: 7.4 per cent; floating: BBSW plus 2 per cent; for B - fixed: 8.8 per cent; floating: BBSW plus 2.2 per cent.
If AA accepts the fixed-rate funds and BB the floating-rate funds, then they both decide they can reduce their cost of funds through a swap, structure a swap where they both benefit equally.
|
AA
|
BB
|
|
Pays to market
|
- 7.4%
|
-(BBSW + 2.2%)
|
|
Pays to other
|
- BBSW
|
- 6.0%
|
|
Receives from other
|
+ 6.0%
|
+ BBSW
|
|
Net result
|
BBSW + 1.4%
|
8.2%
|